Profit warnings from UK-listed retailers drops as sector enters ‘golden’ quarter

UK-listed retailers issued five profit warnings in the third quarter of 2023, taking the sector’s total warnings for the first nine months of the year to 15, according to EY-Parthenon’s latest Profit Warnings report.

The 15 warnings recorded for 2023 so far represents a significant fall of 44 per cent compared to the 27 warnings issued by FTSE Retailers during the same period in 2022.

Similarly, companies in Consumer Staples FTSE sectors – which includes supermarkets and FMCG companies – also saw a year-on-year fall with just five warnings reported in Q3 2023, compared to 12 in the same period last year.

Silvia Rindone, EY UK&I Retail Lead, said, “Despite the easing of cost and supply headwinds, retailers may find themselves vulnerable as they enter shopping’s ‘golden quarter’ if cost-of-living concerns continue. The EY ITEM Club Autumn Forecast predicts a mixed picture for consumer spending. While falling energy bills and easing food prices supported by falling inflation and real wage rises may help to restore consumer confidence, rising oil prices and a weaker labour market are expected to keep pressure on consumer spending.

“A combination of unpredictable demand and higher interest rates is starting to affect those retailers that didn’t realign their business during the pandemic period. Many retailers took action to weather the supply and cost storm of 2022 and will likely need to again this year, with interest rates plateauing and consumer confidence remaining fragile. Pricing and inventory will once again be key priorities for retailers during this period, with many consumers delaying festive spending in order to better manage their finances and unseasonably warm weather during September affecting buying behaviours in fashion retail.”

Nationally UK-listed companies issued 76 profit warnings between July and September 2023, marking the first time the quarterly total has fallen year-on-year since 2021, according to EY-Parthenon’s latest Profit Warnings report.

Prior to Q3 2023, warnings issued by UK-listed companies had risen year-on-year for seven consecutive quarters, the longest run of consecutive quarterly increases since 2008. UK-listed companies issued 86 warnings in Q3 2022 and 51 in Q3 2021. Despite the year-on-year fall, the number of Q3 2023 profit warnings remains 18 per cent higher than the post-credit crisis quarterly average.

The report reveals that persistent inflation and rising interest rates continue to put significant pressure on UK businesses. A third (33 per cent) of the warnings in Q3 2023 cited tougher credit conditions as a factor — the highest level recorded by EY-Parthenon since 2008.

Broader economic uncertainty also played a role across many of this quarter’s warnings, with 21% citing delayed or cancelled contracts and 18 per cent citing weaker consumer confidence. One-in-five (20 per cent) of Q3 warnings cited the slowing housing market as a factor, while the same number (20 per cent) referenced cost pressures.

In the last 12 months, 17.8% of UK-listed companies have issued a profit warning.

Jo Robinson, EY-Parthenon Partner and UK&I Turnaround and Restructuring Strategy Leader, comments: “While it’s encouraging to see UK profit warnings fall for the first time in two years, the growth of credit-related warnings indicates that pressure on businesses is unlikely to ease for the foreseeable future. In fact, we’re seeing economic stresses extend up the value chain, spreading to mid-market companies.

“It’s clear from this data that the steepest rise in interest rates in 40 years continues to take its toll, with a high proportion of warnings due to an increasingly expensive borrowing environment. This poses a risk for companies that are due to refinance and we’re already seeing this affect sectors where credit is a key activity driver, such as in the housing market.

“Unlike 2008’s global credit crisis, today’s companies, banks and consumers all have stronger balance sheets and extended debt maturities, which will continue to stagger the effect of base rate rises. This adds a layer of resilience but shouldn’t create overconfidence. Businesses that are at risk should act immediately to reshape operations to withstand future shocks. Delaying action risks damaging business value, particularly in this fast-moving market.”